Question

Switzerland exports watches to Russia. Watches are relatively capital intensive in their production process. With trade, the price of watches rises by 10 percent in Switzerland. According to the magnification principle: Select one: a. we would expect the price of capital to rise by more than 10 percent in Switzerland. b. we would expect the price of capital to fall by more than 10 percent in Switzerland. c. we would expect the price of labor to rise by more than 10 percent in Switzerland. d. we would expect the price of capital to rise by exactly 10 percent in Switzerland.

Answer 1

Answer:

A) we would expect the price of capital to rise by more than 10 percent in Switzerland.

Explanation:

In foreign trade, the magnification principle is part of the Stolper-Samuelson theorem and it states that the price of a factor that is used intensively in the production of a good or service will change in a larger proportion than the price of the good or service produced. In other words, the change in the price of capital will increase by a larger proportion than the goods produced using it. So if the price of watches increases by 10%, then the price of capital will increase by more than 10%